Mortgage Default Rates and Assumables

Sara had a great post over at the Edmonton Real Estate Blog about Mario Toneguzzi’s article Mortgage arrears soar in Alberta. What made the post really fantastic was the discussion (still ongoing three days later) which followed in the comments.

I pointed out that one thing which is likely contributing to higher arrears is the lack of assumability compared to even 5 years ago. DaBull had a great comment (not all of which I agree with) that I thought was worthy of  sharing with you folks.

During the recession of the early 80’s, mortgages where assumable and you could dollar deal your house (sell for $1.00 and have someone assume your mortgage, the buyer didn’t need to qualify). This even worked with CMHC insured mortgages. I know I bought 6 properties, 5 for $1.00 and one for $2800.00. Had to bring the mortgages and tax bill into good standing so those 6 properties really didn’t cost me just a $1.00 each, they each cost a little more. The name $1.00 deal came from the dollar required to make the contract legal.

This is why in early 80’s you will not see very high foreclosures or arrears rates. Back then people could just sell for $1.00 and walk away. The buyer was now responsible for it. The seller would just wash their hands of it and that was the end of story, thus no arrears or foreclosure showed up in the stats.

Not long after this, CMHC changed the rules when assuming CMHC insured mortgages. The original person who took out the CMHC mortgage could be held responsible for the mortgage default, no matter how may times it changed hands. This rule only applied for as long as it was insured through CMHC. Once the mortgage was below CMHC limits of 75% L/V ratio, it could be $1.00 dealt. But then who would be stupid enough to $1.00 deal a 25% equity property. Banks never needed to put this clause into their mortgage contracts because mortgages with less than 25% equity where insured by CMHC and the CHMC policy applied. Plus with 25% equity no one would need to $1.00 deal anyway. During this time all mortgages where still assumable.

In the 90’s there was another recession in Canada but not in Alberta. Things got tight here but there was no recession. Not having $1.00 deals meant arrears went up higher even though the economy was in far better shape than it was during the 80’s recession. Again the reason arrears where higher than the 80’s was there was now just one less way of getting out a mortgage. Mortgages at this time where still assumable though.
Today. There is no more $1.00 dealing, hardly any assumable mortgages and banks have rewritten term mortgage contracts to make it very expensive to break. If you want to get out of a term mortgage with your kahonies still intact you will need a good mortgage broker or real estate paralegal to decipher your contract and hopefully find a loop hole. They do exist.

Due to banks being public companies and more worried about shareholder value than customer loyalty these days. They have become very strict on enforcing these contracts. To the banks you are just the next quarterly result. The more they can bleed from you the better.
So this is why just looking at historical numbers doesn’t tell the whole story. If you only look at the numbers it would look like this current situation is the worst, when really it’s not. The rules have change, that’s all. They now favor the lender and big time. They have made it almost impossible to get out of a term mortgage contract these days. Well without extremely harsh penalties.

So again a brief summary:
In the 80’s it was easy; sell for a $1.00 wash your hands.
In the 90’s, a little harder; just have someone assume your mortgage and maybe pay you a little.
Now, extremely hard; you either have to pay and pay a kings ransom to get out or find someone that can qualify and buy your property at a reasonable price. And at this time it’s not the best time for either option.

Lucky the economy is starting to pick up steam again, especially here in Alberta. This will help a lot of those in arrears and hopefully they will not end up in foreclosure.

Ahh… the good old foreclosure process. It’s actually very time consuming and expensive to foreclose on someone. I know I just foreclosed on someone last year, not cheap and definitely not easy. Banks also know it cost a whole lot of time and money to foreclose on someone, even someone that is CMHC insured. If you didn’t know, CMHC does not cover foreclosure costs, only mortgage losses. Sara and Sheldon already did a few very informative post on the foreclosure process a year or so ago.